When retirement is far off, several decades away, you imagine it like a dreamy, golden era, where all your debts are paid off and you spend your worry-free days wearing filmy caftans, going swimming in the ocean and golfing in the sun. Yet the reality is, at least a third of Canadian retirees are still carrying debt. Is this normal or a disaster waiting to happen?
According to Registered Financial Planner, Lenore Davis, of Dixon Davis & Company in Victoria, carrying debt during retirement is perfectly okay, provided your cash flow can support it. Yet Ms. Davis counsels that eliminating that debt can make the difference between a doable lifestyle in retirement and one with more freedom.
Clear title = clear sailing
"The number one goal for retirement is to have clear title of the roof over your head," says Ms. Davis. "Old Age Security plus Canada Pension Plan payments should comfortably cover your basic food and clothing requirements, so owning your home outright means one less target on your cash flow."
Many people plan to fund their retirement by downsizing: selling the large family home and moving into a smaller condo. Yet Lenore cautions that this can be a challenge, both psychologically and physically. "You've become used to a certain level of lifestyle," says Ms. Davis. "Unless you move to a different market where real estate values are lower, it can be tough to find the quality of home you're comfortable with, for a cheaper cost, in your own neighbourhood."
Know your spending requirements
To figure out your cash flow requirements, Ms. Davis says to start with the basics. This means the essentials of life, which are the same for all of us: a place to live, food to eat, basic clothing. Is your estimated retirement income sufficient to provide for these essential needs?
If the answer is no, you should meet with a financial planner to talk about how much more you must save, or what kind of adjustments you can make to your housing, food and clothing costs.
If the answer is yes, then you must consider your discretionary expenses. Many people at this point claim they need their cable, their phone, their car. However, Lenore emphasizes that these are indeed "extras" that define your quality of life. They are not necessities for survival.
When do I start planning?
Experts say it's never too early to start on your retirement plan. As you approach your golden retirement date, you should review your plan more regularly to ensure it is realistic and potentially fine-tune your strategy. Ms. Davis says five years before your anticipated retirement date is a good time to seriously review what you need, what your assets and liabilities are, and examine if your plan is achievable. If it isn't, you still have time to make adjustments.
The biggest problem Ms. Davis encounters is when her clients come to see her six months before their anticipated retirement date - only to find out they can't afford their dream. "At that point, it's really difficult to fix things and the only answer is to keep working!"
Retirement versus estate plan
Choosing to save for one's heirs rather than retirement is one of the most common quandaries that Ms. Davis's clients face, particularly among the older female population.
"It is common for older women to sacrifice their retirement lifestyle in order to save money to leave for their kids," Ms. Davis says, "Many women have lived their whole lives focused on the welfare of their children and are not used to spending on themselves."
Money is always a balancing act, according to Ms. Davis. If you want more later, you must have less now. Do I pay this bill today, or that one? The same goes for retirement.
A retired woman may have saved up a solid nest egg, yet psychologically holds back from spending on herself, thinking she will disappoint her children if she doesn't leave behind enough of an inheritance. She may even choose to delay her retirement so as to be able to save more for her estate.
Ms. Davis suggests having a family discussion about savings and personal values. Sometimes it is enough for retirees to hear that they have their kids' permission to spend. "Money concerns are almost always about aligning personal values to goals," says Ms. Davis, "If we can help each other to be happy, the money issues shrink in significance."
The biggest no-no
While housing debt and estate plans can eat into one's retirement cash flow, the biggest trap to avoid is consumer debt, says Ms. Davis. If you often carry large credit card balances or lines of credit due to discretionary spending, this is one habit that can seriously take the shine off your golden years.
Ms. Davis's tip? In the years leading up to your retirement, start living like you're already on a fixed income. "Practice living on what you think you'll need to spend in retirement," says Ms. Davis. "If you can do it, you'll feel comfortable with your decision and in the meantime, accumulate an 'indulgence pot' of extra disposable income for your first post-retirement fling." (Caftans and golf clubs optional!)